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Wednesday, January 1, 1986

What Is a Just International Economic Order?

Dr. Peterson is director of the Center for Economic Education and holds the Scott L. Probasco Jr. Chair of Free Enterprise at the University of Tennessee at Chattanooga.

      This article, orginally delivered as a lecture at St. Joseph’s University last February, is used with the permission of the Intercollegiate Studies Institute.

Free trade brings the world together and promotes peace and prosperity.

We are under attack, both at home and abroad. The target is the rather open—and I think, rather moral—inter- national trading and investment system that has prevailed, evolved, and expanded since the end of the Second World War.

Here in America the attack is now put in the context Of the United States having suffered a record foreign trade deficit of $123.3 billion in 1984 with an even greater deficit in prospect for 1985, as a flood of U.S. imports swamps modest increases in U.S. exports. The Commerce Department reported that the 1984 deficit total came close to doubling the old record of $69.4 billion set in 1983 and was almost three times higher than the previous record 1982 deficit figure of $42.7 billion.

These skyrocketing deficits are leading to growing political pressure for further stifling our nation’s imports and thereby, however inadvertently, setting back economic development throughout the world, especially the Third World. In Washington the political pressure springs from industries suffering the most from foreign competition, such as steel, autos, and textiles. Friends of these industries in Congress are legion. Congressmen and lobbyists claim that millions of jobs have been lost, that more millions of jobs are at stake, and that only further protection will preclude disaster. Imports of everything from cameras to footwear, from copper to copiers, from garments to autos, from Italian wine to Danish silver, are under veiled or open attack. Now a prominent businessman promotes a 20 per cent manufactured-goods surcharge on all imports (phased out over three years) as a means of “attacking” the big U.S. trade deficit.

The very word attack has military as well as moral overtones, and I don’t believe it is unwarranted for me to say that over the longer run world peace, apart from world prosperity, hangs in the balance. A growing system of international cooperation, of freedom and free enterprise—for these are the roots of a just international economic order—is at bay.

Permit me, then, to recall in this regard the slogan of IBM, one of the world’s great trading corporations, “World Peace Through World Trade.” The remarkable 19th-century French economist Frederic Bastiat made this similar observation, “When goods can’t cross frontiers, armies will.”

In other words, I believe that the present international economic order is indeed a just one or at least an increasingly just one, despite the incursions of the Soviet Union and other aggressive states such as Libya, Iran, and Vietnam. But the growing forces of protectionism at home and abroad are inadvertently threatening that order and are asking for retaliation. They are playing with fire.

Why Trade?

Do I exaggerate? Historical evidence abounds on the disruptive power of protectionism, on the correlation between free trade and world peace. In the 17th and 18th centuries, protectionism was, of course, a factor leading to the American Revolution. The American Revolution was triggered by such Parliamentary acts as the Sugar Act of 1764 and the Stamp Act of 1765. The Sugar Act imposed a duty of three pence a gallon on “foreign”-i.e., non-British—molasses, a duty which the New England rum manufacturers insisted would ruin them. The Stamp Act hit lawyers, publishers, and traders, requiring all legal documents to be affixed with royal stamps.

But as Adam Smith noted in his Wealth of Nations, the fundamental economic issue of the American colonists was larger than duties and stamps. It was the central problem of mercantilism, of protectionist Britain putting down the American colonies, regarding them as but a source of raw materials and a market for its wares, with Britain as the master manufacturer, banker, merchant, and shipper.

Protectionism was also a factor in causing the Civil War, with the protectionist forces of the industrial North goading the agricultural South. When Congress passed the so-called Tariff of Abominations of 1828 and succeeded it with an even higher tariff in 1832, for example, John Calhoun led a state convention of South Carolina to issue an Ordinance of Nullification, the idea that the U.S. Constitution, correctly interpreted, empowered a state to nullify Federal laws inimical to its interests. The tariff issue became embodied in the question of states’ rights leading right up to the question of secession and the Civil War.

Again, the McKinley Tariff of 1890 and the Dingley Tariff of 1897 pushed protectionist walls to the highest levels in the history of America and contributed to the international frictions and retaliations culminating in the First World War. If there was a lesson on the counterproductivity of protectionism to world peace and prosperity, it wasn’t learned after that war. For in 1930 came the giant Smoot-Hawley Tariff, approved by President Herbert Hoover. Not only did Smoot-Hawley worsen the tensions that precipitated World War II but it held back in America the recovery that characterized most of the industrial world by the early 1930s.

After World War II, America, to its great credit, extended a program of reciprocal trade agreements, and helped to organize the General Agreement on Tariffs and Trade (GATT) aimed at reciprocally reducing trade barriers around the globe. Postwar historical barriers to world trade indeed have been breaking down the world over, and it is worth noting that since World War II no big international war has occurred. Morever, a good example of the freer trade movement in action happened in the early 1960s when the Kennedy round of tariff reductions produced a pronounced lessening of protectionism and a speed-up of international development, especially in the Third World.

Against this backdrop, however, is a growing return of the philosophy of protectionism. The job of economic education of people everywhere remains unfinished. We must set forth the case for a system of individual private property rights (without which no other human rights are possible), of open international trade and investment—the things which are the basis for a just international economic order. We should get down to the very basis of society: social cooperation, mutual help, mutual production, and mutual trade. The answer lies in the idea of freedom, free enterprise, and limited—repeat, limited—government.

The Law of Scarcity

Is not trade a kind of glue that holds society together? As a teaser, let me remind you of the dozens of English family names that reveal an occupation of generations past. Consider family names like Archer, Smith, Clark, Cook, Banker, Butcher, Fisher, Farmer, Carpenter, Sawyer, Wheeler, Baker, Cooper, Binder, Mason, Hammer, Saddler, Hunter, Teacher, Brewer, and so on. The phenomenon also applies to foreign tongues. Eisenhower, for example, translates to “iron-maker.”

Man trades because of the primordial law of scarcity, the very underpinning of economics, the idea that man must work and produce the means of his survival, or he will perish. Or, as the Lord Jehovah thundered down on disobedient Adam and Eve as they passed through the gates of Paradise: “In the sweat of thy face shalt thou eat bread.”

Work overcomes scarcity, but how effectively? To what extent? Because of the principle of what Adam Smith called division of labor (the idea of particularized work skills, of specialization by occupations to bring about greater productivity), work became more meaningful and far more productive. Men and women over time have sought out different walks of life, different trades, different occupations, different professions, different callings.

Yet specialization or division of labor, of lands as well as people, presupposes the market mandate of barter, of trade, of swapping one’s surplus goods for someone else’s surplus goods, as did Robinson Crusoe and Friday to such salubrious effect. So let me invoke another great principle of basic economic law—the principle of comparative advantage. This principle maintains that total economic well-being is furthered as each person, region, and nation, specializes in the creation of those goods and services which can be produced, in relative terms, most efficiently. In this manner the great bugaboo of scarcity—so universal, so ubiquitous—can be better overcome, with that delightful spinoff, as I noted earlier, of greater international peace. In other words, we can hardly expect a supplier in one country to go around and shoot his customers in other countries.

To be sure, the vehicles for world trade are overwhelmingly multinational corporations. And these MNCs are, of course, greedy, imperialistic, profit-hungry, uncaring, exploitative, and suffering from every other evil invective known to man.

I’ve invoked the concept of profit, the drive behind the multina-tionals, the drive which I equate with self- interest. How can we defend what appears to me so basic and inescapable a part of human nature? This is not to denigrate altruism and the qualities of faith, hope, and charity. But it is to assert the essentially individualistic self-motivated nature of human action, of man ever scouting and weighing options on how to survive, on how to overcome scarcity. And hence the worldwide social need of trade, including international trade, and the uni versal social need to recognize the innate self-interest side of human nature. In this regard, let me resort to that eminent professor of moral philosophy—for that was his title—Adam Smith, who declared in his Wealth of Nations: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity but to their self-love and never talk to them of our own necessities but of their advantages.”

The Ethics of Trade

Self-interest—the profit motive—mightily serves the public interest, the common good. But, in truth, it is not an unalloyed good. The mugger in Central Park, for example, is pursuing his self-interest. Hence, trade must itself be subject to ethical considerations, to the absence of fraud, force, and moral turpitude.

Third World nations must realize, I think, that trade is a two-way street. Profit is mutual and without transfer of capital and technology their peoples will languish in poverty and squalor. Yes, MNCs in pursuit of profits will seek out areas of low wages and natural resources as well as areas of high wages and hence high demand. But is it a crime to seek out low wages (and thereby drive them higher)?

Let me remind you that a century and a half ago the U.S. was itself a developing nation, and MNCs, especially those from England and France, invested heavily in our country, most notably in our railroads which bound our fledgling nation together, North and South, East and West. So, too, have MNCs greatly helped write the success stories of “the Gang of Four” in the Pacific Basin—South Korea, Hong Kong, Taiwan, and Singapore. I also want to take note of how French, British, German, Japanese, and American multinational corporations figured in the successful development of the West African nation in which in the early 1960s I served as an economic consultant—the Republic of the Ivory Coast.

Now, is such an international economic order, as I have described, just? Justice is not the easiest word to define. Aristotle said it is a matter of equal rewards for equals and unequal rewards for unequals. The important black American economist, Waiter Williams of George Mason University, defines social justice as a matter of “I get to keep what I earn and you get to keep what you earn.” I connect justice with ethical choices—rewards for good choices, retribution for bad ones. At any rate, I believe the word “exploitation,” in or out of the Third World, is largely in the eye of the beholder whenever choice abounds in a free society.

The key to understanding the relationship between a buyer and seller, employee and employer, saver and investor, producer and consumer is freedom—i.e., voluntarism, the absence of coercion, the ability to shop around for the best offers and the best bids. Such freedom for the individual tends to lead to strong and vigorous economic development as well as to individual well-being.

As a model of such economic development let me offer the case of Hong Kong. Hong Kong is not without problems, but it has prospered without much, if any, government planning and with minimum taxation and regulation. This British Crown Colony, which reverts to Chinese Communist control in 1997, stands as a monument to the remarkable creativity of free trade.

Hong Kong is a city with a population of 5.5 million, mostly refugees from Mainland China, occupying an area of 400 square miles at the tip of South China. Among other things, it is:

•       the world’s largest exporter of garments, toys and games;

•       the world’s major supplier of light consumer items including clocks and watches, plastic and artificial flowers, batteries, watchbands, candles, electric fans, and so on;

•       the second busiest container port in volume in the world after Rotterdam;

•       the second largest shipowning center in the world;

•       the third largest international banking and financial center in the world.

On top of the above, Hong Kong has:

•       a GNP per capita only lower than that of Japan in Asia;

•       the second highest per capita consumption of electricity in Asia;

•       on a per capita basis, more bank branches or representative offices than any other territory in the world;

•       the highest telephone density in South-East Asia;

•       the highest vehicle density in the world next to Monaco.

Having said all this, I am hopeful that you see that the push for protectionism and the assault on multinationals are destined, for the most part inadvertently, to hurt the very people that the purveyors of these ideas say they wish to help—namely, the consumers at home and abroad, including the consumers in the Third World. Protectionism, you see, crushes choice. It denies competition. It depresses living standards. It robs the consumer of one of his most precious possessions—his sovereignty. Where has the consumer fared best, for example, in Ghana where for the most part MNCs have fled, or in its next-door neighbor, the Republic of the Ivory Coast where MNCs proliferate and average per capita income is around three times greater than in Ghana?

Despite all of this, in Washington we witness bills dropped in the Congressional hopper to curb the power of foreign MNCs, especially those of Japan, which are “viciously” flooding the country with Toyotas, Sonys, Canons, and Panasonics, and so on. The United Automobile Workers, for example, has pushed for “domestic content” leg-islation-legislation designed to make sure that new cars sold in America have up to 90 per cent of their parts manufactured in the U.S. and that up to 90 per cent of the labor in the assembly of those cars be supplied by American workers. Such 90 per cent parts and labor requirements would make auto imports all but an impossibility. It would make the price of new cars greater by many hundreds of dollars, just as now the so-called “voluntary” auto import quotas imposed on Japanese producers result in the American consumer having to pay hundreds of dollars more for his new car today. Are such attempts with such results moral? I think not.

The Need for Economic Education

The only solution to the problem and challenge of achieving an even more just international economic order is economic education. I believe we as educators should reassert the moral basis of freedom and free enterprise. The moral basis of government was well stated, in effect, by Lord Acton, the great English Catholic lay philosopher, who said that “power tends to corrupt and absolute power corrupts absolutely.” Acton saw the case for limited government, as did John Locke before him. Locke declared that the only reason for government was for the protection of life, liberty, and property—a phrase reflected not by coincidence, in the Fifth and Fourteenth Amendments to the Constitution. To be sure, Locke used the word protection but here what he meant was not freedom from competition. Rather, he meant the inviolability of property from arbitrary seizure by the state. He meant the right of property owners to sell or hold or invest their property at will. He meant, in a phrase, freedom and free enterprise.

In other words, economic educators have the considerable job of making clear:

•       that tariffs don’t protect jobs (actually they destroy jobs),

•       that the rich hardly become richer by exploiting the poor (actually they get rich in a market economy by enriching the poor, and by raising living Standards through capital formation),

•       that if we don’t buy Japanese cars and copiers the Japanese won’t be able to buy our airplanes and soybeans,

•       that if we don’t buy Mexican cotton and Brazilian sugar the Mexicans and Brazilians won’t be able to repay their huge debts to American banks.

In a free society choice is critical. The sovereign consumer has every producer, big and little, by the jugular, as Ludwig von Mises pointed out. In the market the consumer is King or Queen Customer.

The market system is a moral system, a system of voluntary social cooperation. What is more, it is the Golden Rule in action. As you know, the Golden Rule says, “Do unto others as you would have others do unto you.” What does the market say? It says, in the words of Adam Smith in his Wealth of Nations: “Give me that which I want and you shall have this which you want.” The market, in other words, says, let’s cooperate, let’s work for each other, let me help you so you can help me.

Let us view a just international economic order as a worldwide system of exchangeable private property rights and limited government—government steeped in the philosophy of free trade and open investment. Let us, then, educate on the case for unhampered world commerce as a key way to help each other at home and abroad. Inter national free trade is a way to bind the world together and elevate it to a new vista of world peace and prosperity, of world respect and understanding.

  • William H. Peterson (1921-2012) was an economist, businessman and author who wrote extensively on Austrian Economics. He completed his PhD at New York University in 1952 under the supervision of Ludwig von Mises.